Earnings season to test market bulls

The bull run that has sent stocks soaring will be severely tested this week amid pessimistic predictions for Australia's earnings season.

Analysts tend to agree that Australian stock prices have been pushed up too high, having rallied 20 per cent since May last year to 20-month highs and six per cent in the last month.

However there is no evidence that listed companies are broadly earning more.

In fact, since the last earnings season in August, there has been 21 profit downgrades among the ASX200 companies compared to just three upgrades.

The magnitude of the downgrades has also been far greater: scrap metal recycler Sims Metal is the biggest culprit lowering earnings by 63 per cent, while miner Whitehaven Coal expects a result 44 per cent below original hopes, according to Patersons Securities quantitative analyst Kien Trinh.

The biggest upgrade among the top 200 companies is fuel group Caltex, which lifted forecasts by 20 per cent.

The downgrades, combined with a weak macro environment in the past six months, especially domestically where job growth, consumer confidence and spending is weak, point to weak earnings.

The ratio of analyst downgrades to upgrades is 2:1 for the ASX200, with growth expected to be just 3.0 per cent in 2013, compared to the 13 per cent being forecast a year ago.

Credit Suisse says very weak growth is expected for the more cyclical metals and mining and consumer discretionary sectors.

The largest proportion in downgrades has come from mining, while asset write-downs will also figure heavily following Rio Tinto's $14 billion hit - meaning it will post a statutory loss - and more expected in the sector including from BHP Billiton.

The positive thing about downgrades is that they mean less surprises and less chance of share prices falling during the earnings period.

Moderate growth is expected in energy, insurance, media and telcos.

CommSec chief economist Craig James was also optimistic that there may be some positive surprises in the retail sector, following dramatic earnings upgrades by womenswear retailer Specialty Fashion Group and retailer Kathmandu.

Specialty shares soared 35 per cent when it recently said it expected to triple profit to $17 million to $18 million in the first half.

On Friday, Kathmandu tipped net profit for the first half of $NZ9.5 million and $NZ10 million ($A7.71 million and $A8.12 million), up 75 per cent on the $NZ6 million ($A4.87 million) it reported in the previous corresponding half-year period.

"Most economists and analysts would have thought that was unheard of (for retailers) a few weeks ago," Mr James told AAP on Sunday.